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I agree.
What happens to all that paper wealth that's been created?
Regards
Guy
> -----Original Message-----
> From: owner-metastock@xxxxxxxxxxxxx
> [mailto:owner-metastock@xxxxxxxxxxxxx]On Behalf Of Ron Sanders
> Sent: Saturday, August 22, 1998 9:54 PM
> To: metastock@xxxxxxxxxxxxx
> Subject: Is DEFLATION the key ??
>
>
>
> I scanned a news article I read at the bloomberg.com financial website the
> other day and have included it below. It was written by Maggie Mahar (no
> idea of her backgroound or credentials) who is a columnist for the
> Bloomberg News.
> She indicates that deflation is a bigger concern right now than inflation.
> Is she right? Or is this just one small part of the problem that is
> dragging down markets latley?
>
>
> On a lighter note: With the recent bombing of the terrorists by the US, I
> guess it's true....old Bill still has trouble keeping "his missile in his
> silo"
>
>
> Is Deflation Our Greatest Threat?
>
> By Maggie Mahar
>
> (Maggie Mahar is a columnist for Bloomberg News. The opinions expressed
> are her own and don't represent the judgment of Bloomberg LP or Bloomberg
> News)
>
> New York, August 21 (Bloomberg) -- As the financial media strive
> to keep up
> with the volatility in equity markets world-wide, prudent journalists
> strive for balance "After all, who wants to be accused of causing bad news
> by commenting on it (Not to mention the risk of being wrong)
>
> So in the interest of "'balanced reporting" experts on both sides of the
> issue are trotted out.
>
> Evenhandedness has its merits, especially when the question at hand is
> complex But in this case, the issue is cut-and-dried -- either the bull
> market is over, or it's not.
>
> While the debate rages, the numbers pile up And it's not just stock market
> indexes that have been declining. In both Europe and the U S,
> prices -- and
> profits -- are sliding. Deflation is replacing inflation as the greatest
> threat to economies world-wide.
>
> We always knew that the end of the bull market would come out of left
> field. Now it appear" that's exactly what's happening. While
> everyone was
> keeping an eye peeled for inflation, the numbers were running the
> other way.
>
> Officially, inflation in the US is approaching zero, but "for all
> practical
> purposes it's probably already in negative territory," observes
> Jean-Philippe Cremers, a portfolio manager who helps pick stocks for
> top-ranked GAM International and GAM Global (Among global and
> international
> funds tracked by Bloomberg, the two GAM funds rank No 1 over five years,
> over the past three months, GAM International places 4th among 390 funds
> while GAM Global ranks 4th among 191).
>
> Prices of manufactured goods and autos "are already falling,"
> Cremers notes
> Moreover, "the official tally doesn't incorporate changes in technology
> While the power of the products rises, prices drop."
>
> But it's the numbers coming out of Europe that are startling Cremers calls
> them "exceedingly strange for an economy in the first phase of recovery."
>
> In Germany, for instance, June retail sales dropped more than expected
> --off 3.1 percent for the month -- and down 2.7 percent from a year
> earlier. In July wholesale prices fell 0.9 percent
>
> In Italy, consumer prices were flat in July, and economists expect they'll
> remain unchanged in August. It's the height of the tourist season, yet
> restaurants and hotels haven't been able to raise their tariffs.
>
> Meanwhile, industrial production fell a greater-than expected 2.1 percent
> from May to June. "There is a hesitation on the part of consumers who seem
> to lack confidence in the economy," Flavio Rovida, an economist
> with Caboto
> Holdings in Milan told Bloomberg. "Internal demand will likely continue to
> decline in coming months." And in Switzerland, producer prices and import
> prices remained flat for July, down 1.5 percent for the year.
> "Deflation is
> going to be a threat in many, many industries," Cremers predicts
>
>
> Greater Threat
>
> None of this means that deflation is a certainty, but it's definitely the
> greater threat. Which suggests that investors might want to take a
> defensive position by paying more attention to sectors when
> selecting stocks.
>
> First, though, take the measure of the monster. Deflation didn’t exactly
> creep up on us. In the past two years, commodity prices have reached an
> historic low in real dollar terms. And in the U.S. the prices of
> manufactured goods --which make up 40 percent of the Consumer Price Index
> -- have been falling since 1996. We ignored falling prices because
> disinflation by and large was good news for consumers. But now it's not
> just potato chips and microchips that are cheaper. Inflated assets are
> beginning to hiss. That matters because Baby Boomers who watch their
> assets drop aren't as likely to shop. Nor are their bosses inclined to be
> lavish with raises. (Wage deflation is tricky - while prices slip,
> salaries stay sticky. But stagnation is easy.) That said, consumer
> confidence is high -- almost as high as their credit lines
>
> But, as David Tice, manager of the Prudent Bear Fund, points out, easy
> credit has been masking deflation by pumping up the price of real estate,
> restaurants, cigars and other luxury products while the cost of
> manufactured goods fell. AS a result, prices looked flat "We probably
> should have had 2 percent to 3 percent deflation over the past
> few years --
> thanks to easy money, we've had mild inflation," says Tice "The credit
> bubble is another balloon waiting to pop"
>
> Job Creation
>
> But wait a minute, even if consumers give up malls, won't they still buy
> stocks? Where else would Boomers put their billions?
>
> The short, ugly answer is that paper profits burn quite easily.
> If the Dow
> continues to slither south, boomers will have less money to worry about
> --fewer dollars will be chasing the same number of stocks.
>
> The Asian crisis is the trigger, not the root cause of the
> problem. Global
> deflation had a head start -- add low-priced imports, and more and more
> blue-chip companies will announce lower earnings.
>
> Just in the past week, for instance, Veba A G. Germany's largest utility
> announced earnings fell 3.6 percent for the first half of '98
> (the price of
> silicon wafers is falling)
>
> Up 'til now, U S manufacturers could make up for their lack of pricing
> power by restructuring and increasing productivity. Much of that
> cost-cutting has now been done. As for Europe, restructuring is much more
> difficult, says Cremers. "Social legislation stands in the way, and
> meanwhile, unemployment remains high -- we just don't see much
> job creation"
>
> In theory, shrinking inflation in Europe is a sign of economic strength.
> In fact the hot air balloon is plunging toward ground faster than anyone
> expected.
>
> In France, Bloomberg News reports, "consumer prices fell faster in July
> than in more than 40 years -- down 0.4 percent after rising only 0.1
> percent in May and June. Meanwhile German inflation has hit 0 9
> percent --
> the lowest level in 10 years.
>
> Deutsche Banks's chief economist, Norbert Walter, sounded the warning last
> week, forecasting "only limited chances for growth in Germany's economy
> this year," adding that "Asia's financial crisis could trigger a
> "worldwide
> period of economic weakening"
>
> Different Strategy
>
> That's why Cremers is avoiding cyclical stocks "retail, chemical, steel,
> focusing instead on banks, insurers, and drug companies.
>
> Roughly 40 percent of GAM International's assets are invested in financial
> companies because in a deflationary environment, it's always
> better to be a
> lender. When inflation reigns, borrowed money is cheap -- you repay in
> dollars with less purchasing power. Yet when inflation swings
> into reverse,
> and prices drop 1 percent, a 7 percent loan winds up costing 8 percent.
>
> This sounds like good news for bondholders -- and it can be. But
> the health
> of corporate debt depends on corporate profits, when earnings slide, so do
> credit ratings.
>
> Cremers' sees better prospects elsewhere.
>
> "We prefer to play the bond market through the financial sector (since) we
> expect interest rates will favor earnings," he explains.
>
> Insurance companies are attractive not only because they invest in bonds,
> but "with low inflation, they'll be paying claims in currency
> that is worth
> less," Cremers points out. Three insurers rank among Gam International's
> top 10 holdings, accounting for over 9 percent of the portfolio.
> AXA-UAP in
> France, Fortis Amev NV in the Netherlands and Zurich Allied AG in
> Switzerland.
>
> Four banks account for another 15 percent of the fund's holdings Barclays,
> Bank of Scotland, Credit Lyonnais and, in the Netherlands,
> ABM-Amro Holdings
>
> 'Inflation Is Zero' But what about the banking industry's
> exposure to Asian
> and Russian debt? The recent bank sell-off, like most mass movements, has
> been indiscriminate. As Cremers points out, "not all banks carry Asian
> debt Fortis has some exposure," he acknowledges, "but it's small and
> indirect - through merchants in the Netherlands" "We don't own any German
> banks he adds. Not only are they vulnerable to emerging markets, they're
> exposed to the cyclicals in Europe that he's trying to avoid . "When you
> buy Deutsche Bank, you buy many companies in Germany. We prefer Dutch and
> Belgian banks -- they're much cleaner banking plays."
>
> GAM also counts on mergers to spur earnings in the financial sector. When
> banks consolidate they don't have to make difficult personnel decisions,
> they just shut down branches. "Fortis, for example, just bought, Generale
> de Banque, Belgium's largest bank, and they'll be closing 700 branches out
> of 1700," says Gremers.
>
> There's just one other sector which offers broad immunity to deflation
> --pharmaceuticals, he says "Drug companies can still increase prices - in
> the U S they've gone up three percent in the last few months," Cremers
> observes. Even in Italy, where the cost of housing, utilities, food and
> hotels dropped in July, prescription drugs climbed 0.7 percent
>
> Novartis ranks among the top 10 in both GAM Global and GAM
> International. "
> We also own Merck, Schering-Plough, Johnson & Johnson, Amerisoft, and
> Zeneca, the second-largest pharmaceutical in the U.K.," says Cremers.
> "Recently, we added Warner-Lambert Co -- they have a new cardio-vascular
> drug, and we don't see any competition for many years"
>
> By assuming deflation, GAM is taking a cautious approach. But as Cremers
> describes it, the upside is hardly conservative: "We're investing in
> sectors where we expect earnings to grow 15 to 18 percent -- in a world
> where inflation is zero".
>
>
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